Itera ASA

OSE:ITERA

Earnings Call Transcript 2022-Q2

[Arne Mjøs, executive]

Hello, everyone. Welcome to the interim report for the second quarter. My name is Arne Mjøs. I'm Chief Executive Officer. And together with me today, we also have Bent Hammer, Chief Financial Officer, where we are going to go through the same agenda as the previous quarter.

So I take the highlights of the quarter and the business review section and then Bent Hammer will join in and take the financial review and outlook. There are also a chat. So if you have any questions, please post the questions in the chat, and we will look into it during the Q&A session. Otherwise, you can invite Bent and myself to a meeting, so we can go into more details as needed.

Okay. Let's start with the highlights for the second quarter. In brief, I will say we had an organic growth of 22%. Everything at Itera we talk about numbers is organic. We don't have any kind of acquisition in the revenue. So it's a pure organic-driven company that delivered 22% organic revenue growth and had an operating margin of 11.2%.

As you know, when we talked about last time, we have an operation in Ukraine. So the situation in Ukraine for our employees and also our deliveries has been really stabilized. So it's -- we are coming to a normal situation. We are working from home or from our offices. A lot of the Ukrainian people have also moved back to their home cities or homes because of the situation in Ukraine -- the worst situation is more in the eastern part or south of Ukraine.

In addition, we have also implemented 3 more location offices in the Czech Republic, in Slovakia and also in Poland. I'll come back to that one.

As I told you in the first quarter, we have also this -- the closedown of our data center operation. So establishing a new cloud application services unit that will do the same cloud journey that we have done for Itera on data center for the last 2.5 years. We have also done that for some other customers, but now we are really industrialized to make it even more effective and also onboard or support or enable a larger customer to also do the same cloud journey.

That's also important to talk about in that case is actually we have also established a partnership with Microsoft consulting organization. They are the organization that are working with the larger clients by Microsoft because these organizations where we also hired to establish the cloud center excellence at Itera and now we're taking the partnership to a new level where we also will collaborate on sales and deliveries together.

In the quarter, we also had a book-to-bill of 1.1 in the second quarter. And I just want to mention one of the contracts because we managed to win strategic contract, frame agreement with one of the public sector in Norway or units with an expected value of NOK 40 million to NOK 60 million. And that is also where we are using all capabilities at Itera, our Digital Factory at Scale, but also world-class Cloud Center of Excellence. So I'll come back to also that later in the presentation.

Number of employees increased by 122 in the last 12 months, of which 19 in the second quarter. And we paid an ordinary dividend for 2021 of NOK 0.20 per share. We also have the rights from the Board of Directors, we also have an additional payment later this year. That has been the normal that we have paid dividend payments 2x -- twice a year.

Okay. So let's look at the key figures before Bent Hammer will go into more details. As you see, the organic growth is 22%; in terms of number of employees, 23%; and also the operating margin is 11.7%.

In the previous -- the last -- the second quarter in 2021, the margin was 3.2% higher and that is because we also -- after the discontinuation of the data center, we also are investing in our industrial products for cloud journeys. So I'll also come back to that. So I think maybe 2.5% of that is related to the industrial product -- investment in the industrial products in the cloud journey for our customer.

Okay. So then I go to the business review section. First of all, I just want to continue the discussion we had in the previous quarter where we talked a lot about the Russia invasion. Of course, it's a key topic for everyone, also not at least at Norwegian Confederation of Enterprises, NHO Annual Conference in May, and we were invited to be a part of the Keynote section because everything involves about the changed agenda, to talk about new security situation in Europe after the Russian invasion but also not at least how to support Ukraine. So that is -- what we have been talking with also the business is extremely important that we continue buying more products and services from Ukraine.

And I believe it's more maybe one of the biggest corporate social responsibilities for business is not enough for all the governments to invest all the money. We also need to keep the business running in Ukraine. So I visited Ukraine both in April and June. Some of that tell me, I was the first executives have done that. But anyway, for me, it was extremely important to go and visit Ukraine, the cities, but also take by car, traveling between the cities, so I think I traveled more than 2,000 kilometers with car through the Western part of Ukraine.

So I'm very proud to see how they were, the life and also the work environment for our employees. It's quite normal to go to the shelter. We are working from the shelter. If needed, we go to the shelter, but anyway, it's a full WiFi connection because we are not based in the warzone actually. So there are still some missiles that are coming to some of the cities, but they are quite used to, a lot of the people down there, it's not -- they don't care about go to shelter either because they have this air [ serene ] more or less every day, but that's a new normal situation. So they managed to balance the risk from the war, but also take care of their life and also keep running their business or the job opportunities.

And in terms of cybersecurity, we have implemented new cybersecurity services in the cloud because everything we are doing is in the cloud. So that is -- we don't have any kind of exposure for cybersecurity because we are using the best technology based on Microsoft's technology and also as a country, as you know, that they have been implementing, I will say, the world-class cyber security. Otherwise, they have been much more destroyed by the cyberattacks from Russia and other places.

So during my meeting in my visit in June, I also visited several of the ministers in order to look at how Norway, how the Nordic countries can actually contribute to the reconstruction of Ukraine. So there is actually a Marshall plan coming in. It's about NOK 7,500 billion. It's a huge amount, and most of it will be from some of the Russian assets that are blocked by -- in the Western part. So there is a lot of discussion about how each country should contribute to the restoration or rebuilding of Ukraine.

So from Norway, our Prime Minister, Støre; and the President, Zelenskyy has talked about that Norway should take a lead position in the energy transition, both in Europe but also not at least for Ukraine. So that was some of the talks that we'd have brought back to Norway.

And also during last week, there was a huge event in Arendal, where we call it Arendalsuka, where I think it's the other -- the one of a kind meeting place for public and academia and businesses to talk about the challenges going forward. So we brought in this -- to this Arendal's week to have some kind of debate in the Arendal -- during the Arendalsuka.

And we invited on video the Vice Prime Minister and the Minister of Digital Transformation in Ukraine to have a speech to the Norwegian business authorities during the Arendalsuka. So I just want to show you, it's a 1.5 minute, where I think has a very strong message. So let me try to put this on. So please.

[Presentation]

[Arne Mjøs, executive]

Okay. So the key message is actually act now. We need to act. And from Itera perspective, we are looking at the energy transition. That's one of the key industries that Itera is focused on how to empower also for the sustainable future. So this is -- in order to be successful in the energy transition, of course, you need to have also the digital transition in place.

So what Itera can do is actually we can help the customer both in terms of operating for the future, in terms of the more intelligent supply chain, in terms of having taken care of or integrate all the renewables into the new energy system. Of course, we can help transform the workforce in terms of enabling the field worker to become more digital. So we are talking about digital field work. We have all the tools in addition to the physical world is normally operating in. So we have both what we call the digital twin solution but also connected to the physical environment that normally is a part of.

The third area is about transition to the clean but also not at least reimagine the energy in terms of accurate energy efficiency, the scale or integrated electric vehicle with the batteries, large big batteries for the electricity. So it's a quite complex energy system that are actually arising in the future. So what we are doing is putting our digital factory; instead of only having people, we are also trying to industrialize the way we're delivering our services.

So that's what we have done during the 2, 3 years, building or industrializing our delivery capabilities in terms of a digital factory for data-driven business to increase the innovation, speed, scale and quality.

So -- and we partnered with Microsoft. We are quite agnostic but not at least also with Google, Cloud and Amazon or IBM Red Hat or one of the customers that also have quite interesting technology, Cognite or Salesforce or whatever. So we're quite agnostic in terms of always trying to put together the best pieces of technology in order to enable the customer business and digital strategy. So that is what we are doing. So in terms of Ukraine and the energy transition in the Europe, but not at least also in Ukraine, we have very strong capabilities.

We talked about capacity. Of course, Itera has organic-driven capacity. So during this quarter, we have established 3 new offices. So when we're establishing office at Itera, it's always according to one operating model. So it's quite easy, I'll say. It's not only -- it's never easy to enter a new market, of course. But for Itera, as long as we keep the business model, the ONE Itera running at the same way in all of the places, it's quite easy to rotate the people from one location to build up a new location in other place. So that is what we have done.

We have established 3 new locations, 1 in Zilina, which is not -- which is within Slovakia where we have office at in Bratislava. So this Zilina office will be satellite office to the Bratislava office will be -- so we have already -- and we have some people already living there. So it's not far from Bratislava, it's 2 hours driving. So in this place, we increased the attractiveness of Itera because instead of having all the people going to Bratislava, we have established an office in and close by -- close to the Bratislava office. And this is smaller city, so it's quite interesting to actually tap into a small city, where not all the competitors are located or trying to fish in the same bowl actually. So it's a nice place to actually attract people that would like to see -- live in this smaller city, not far from Bratislava.

Another office is in Brno where we are targeting one of the largest tech universities or this with -- asset with a lot of talents, not at least for some specific talents that we are looking for. It's also very close to Bratislava and as Slovakia and Czech Republic has been quite culture fitness, so this is also organized in the range of our Bratislava office.

So that we have established a new office in Brno and the last but not least also Krakow, which is where we have some of the people, Ukrainian people that moved to Ukraine, now to Poland and Krakow just after the invasion. So -- but we also decided to hire local people in Ukraine and build an office. So that is also up and running. So we have started some smooth establishment of new offices.

And what we will see in terms of capacity, we will still continue to grow Ukraine after the second quarter. We have stabilized situation, and we are looking forward to increase the growth during the second half year because a lot of companies are also coming to Itera and saying, "I would like to stand with Ukraine. Can you help me? Can we have people from Ukraine through Itera?" That work for our -- in our digitalization project in the Nordics. I also believe that there are more customers that would like to contribute and IT is one of the services that's quite easy to deliver from any places.

So -- but in addition, we have also 2 offices in Slovakia, 1 office in Poland, 1 office in Czech Republic, so we have quite good capacity and flexibility to actually continue our growth. So that's what we did in the second quarter to invest in new offices, to continue the growth in terms of -- independent of any kind of situation that could happen in Ukraine or not. So that is one of the area that we are working on in order to increase the capacity and supply at Itera, now also in Central Europe in addition to Eastern Europe that we have been in the past. So that is one area.

The second area I will talk about, actually the cloud journey because we have -- we closed down our own data center. So we have been through cloud journey. We have moved all the workloads from the data center at Itera into the cloud. So also using the relationship with Microsoft, we are also industrialized as the best practice way to move more and more or help or support more and more customers to do the same cloud journey because 95% of all new digital workloads will be deployed in the cloud or on cloud native platforms by 2025.

So a lot of customers are saying that we have cloud first strategy because the security set is more easy to establish and use in the cloud instead of having on the data center. There will still be customers working on the traditional data center. So we're also talking about hybrid cloud. So that is what we are doing through this kind of assessment to try to identify what are the current situations. Then we define the end target situation and looking at both the business strategy and the digital strategy and make a business plan for it, business case and also business plan. What kind of workload should you move first, and then last, what should be replaced by a SaaS service? And what should you actually just retire by the down the road?

So after this kind of planning, we will establish -- start with migration and modernizing the different workloads. So that might take 18 to 36 months depending on the ambition for the customer.

So that is, I will say, from Itera perspective what we have actually invested in the last 2 years, but also after the closing down of the data center is actually to establish this kind of growth engines. So it's for me, is some kind of industrialized products. So we also get a lot of new portfolio of customer that will actually do this kind of cloud journey. It's a large investments and large use of activities in 2, 3 years for the customer. That is the new growth engine in Itera, but we are already -- from the core business, we are already using, delivering cloud-native application for a lot of customers. So this is how -- this is the DNA of Itera, how we build this application.

Now we're actually doing this kind of transition and help more and more customers that as I said cloud first in this strategy. So that's a huge opportunity. That also will bring increasing managed services and also not at least subscription revenue for Itera.

So what we are doing is actually doing more for less. That has been the main driver. And another, I will say, doing more for less initiative is actually the Low Code because according to some estimates, there is a shortage about 85 million tech workers in 2030. It's extremely high numbers. And the reason for that is that all industry is actually becoming a tech industry. So everyone should be a developer more or less. And it's not possible to develop or educate so many developers. So what the industry tells me to do is actually to develop the tools where everyone can become a developer because you don't need to write any kind of code. It's a Low Code or No Code you call it.

So for Itera, we established a Practice. We have Ulrikke, as a new Practice Lead, which is also a Microsoft MVP person. So she's one of the recognized, most skilled person in this area. She has a very strong passion for this, and it's extremely valuable for all the customers because it is much easier to build these kind of solution like dashboard or reports or whatever using the tools in the platform. So the -- this practice fits quite well with the Digital Factory at Scale at Itera, where we are really building this application quite fast with a high value for the customer, and the customer by themselves can also build and continue building this application by their own -- by themselves.

Okay. So that is talking about the Digital Factory and the cloud journey and I'd just also would like to mention Microsoft. We also -- we have a quite agnostic approach. But in this case, I just want to talk about Microsoft because they -- we engaged them to build this Digital Factory at Scale and using their best practices but now, we are taking the partnership to the next level, where we are also working jointly on sales and delivery opportunities.

They have a strategy to target the largest customers. So on the large customers, we will be a subcontractor to Microsoft because they will use our competencies and capabilities. But we are -- when we're working together with Microsoft on the largest customer, we will also get the learnings that we can bring into our Digital Factory and also bring it to other customers because Microsoft consulting services do not have time or resources to work with any kind of customer. So by using this kind of collaboration on sales and delivery, we really are getting the best practices, I will say the IP, intellectual property, that Microsoft has established, learning from the leading worldwide organizations. So that's a very strategic competence partner.

What I will say that being together with Microsoft or maybe IBM Red Hat or whatever, we do not have any kind of limitation of what kind of customer, the size of the customer or where the customer is placed in order to compete with other large vendors. So that has been one of the drivers that we are delivering services to about 20 countries around the world. So we are following the customer from a Nordic perspective but are delivering services to U.S. or to Germany, whatever because we have this Digital Factory at scale, and we have these partnerships, we have the scalability also in terms of competencies and also the best new services in the cloud in order to manage to meet any kind of challenge or complex need.

Okay. Just to talk about 2 cases. One is actually from an existing client, Storebrand, which has been, I will say, taking a strong position in sustainability. So what we have done for Storebrand is actually to build a sustainability dashboard that visualize how the pension savings for business customer score, how they score on sustainability. So Storebrand has actually taken sustainability as a core differentiator for the business customer. So that's just one example. It's a large customer to Itera. But in this case, we are really working on building products driven by sustainability.

The other example is the Directorate of Integration and Diversity, I will call it directorate or department. We are entering 2 plus 2 years frame agreement -- framework agreement with an expected value of NOK 40 million to NOK 60 million.

So in this case, we are using our Digital Factory at Scale and also world-class Cloud Center of Excellence because they would like Itera to help them to develop and modernize all kind of digital registry services and ensure that this customer has the necessary expertise and capacity to establish a modern, cloud-based platform.

So this is a case we are using all kind of industrial products where you're working in multidiscipline teams in our Digital Factory at Scale, and we're also doing this cloud journey for this customer. So it's a really exciting customer. It's quite interesting to also -- the value of it, I will say, because we are really spinning off more and more projects for this customer.

Okay. Let me finish my part before Bent Hammer goes into the financials. I just want to mention the book-to-bill ratio is 1.1, as I said, in the quarter and 1.2 for the last 12 months.

We show you here the customer development, existing customer accounting for almost 90%. It's up from almost 85% last quarter. I will try to get even more new customer. I think the situation in Ukraine in the second quarter that we need to concentrate on the existing customer has some kind of impact on that, but I'll try to go back to more or less 50% of the revenue, which is a very strong key price versus our competitors, we are really pushing on to have more and more customer for Itera. And as you see, the share of revenue of the top 30 customers is 82%. So we have a very long-term relationship with the customer staying with Itera for a long period, all of them.

In terms of number of employees, we are 661 employees at the end of the quarter. And if we look at the Nearshore ratio, the people working from Central and Eastern Europe is about 54% of the business. And if we look at illustration at the bottom here, rolling 12 months net FTE growth is showing quite interesting growth because that is what I believe that we should build the capacity increasingly in the last 12 months should actually continue the growth, because that is the one of the growth engine for a consultancy company, and we do that organic, pure organic growth in Itera.

And I tried to put this curve to even higher level, 150, maybe 250 people. So that's the ambition we have in the long term as long as the macroeconomic environments quite stabilize. So we always need to look at the macro environment but in a way, so that's our driver for the growth for the Itera.

So let's go into the financial review. Bent Hammer?

[Bent Hammer, executive]

Thank you, Arne, and good morning to you all. Yes, as I said last quarter that we would strive to achieve the same type of growth figures in Q2 as we did in Q1, and I'm happy to say that we succeeded. So we have 22% growth in the second quarter and also for the first half of the year as a whole.

So it was particularly in our own services that we had high growth with 25%. And also the subscription-based services grew by 34%, whereas the third-party contractors that we use in the business declined by 24%, I believe it was.

So overall, very positive top line growth. We see the personnel expenses were up 27%, and that's mostly due to the number of employees rising, the cost per employee only rose by 1%.

Also other OpEx up by NOK 3.6 million, that's partially the society returning back to normal after 2 years of COVID. So we see people go into external seminars, do some traveling again and not the least, have some social activities which we have really longed for doing for a while now. So that's good, positive spending, I would say.

We also have some costs related to the development of our 3 new offices. In terms of OpEx, that will probably be more dominant in the third quarter. We have now established recruiting capacity -- management capacity, et cetera, to drive that growth. So we'll -- it will take a few months before we start catching up in terms of revenue on that spend.

Depreciation, up by NOK 1.2 million, and that's primarily related to the investment we did in the Cloud Center of Excellence of last year. So now being amortized. So that left us with an EBIT of NOK 21.5 million, which is 4% down from last quarter -- sorry, last year's quarter and EBIT margin of 11.7% versus 14.9% in Q2 of last year. Year-to-date, 13.3% margin, which is 1.8 points down from last year.

There are 3 sort of main overarching factors I would like to highlight and that one is that we have obviously spent this second quarter to try to stabilize the situation in Ukraine which we have done a tremendous job, I would say, both the management team inside and outside of Ukraine, but also our Ukrainian colleagues themselves have really shown what great people they are, very, very much willing to stand up and fight and continue to deliver the high quality they always do to our customers regardless of the surroundings they are in at the moment.

Second, as I mentioned, the investment in new delivery capacity. So obviously, quite effort -- a lot of effort that goes into setting up 3 offices in parallel. So that's something that takes a toll on the organization, but it's progressing well.

And lastly, we have -- last year, we built the state-of-the-art service offerings in terms of the cloud operations. Now we have the available capacity to be ready to take onboard larger customers that are ready to jump on this cloud journey. So that business as well will take probably another 6 to 12 months before it has the sufficient volume to sort of justify the capacity that we have currently and that we need to be able to succeed in this business.

Looking at the sequential development, we see that we have a very steady growth path. In fact, we have grown by 17.8% on average over the last 2 years. And we have done so with an EBIT margin of 12.5%, which I would say is in the upper part of our industry. So we are very satisfied with that. Both revenues and margins will fluctuate a bit from quarter-to-quarter, Q3 being the most difficult quarter for us as we have all the vacation -- summer vacations being taken in that quarter.

In terms of cash flow, we generated NOK 13 million from the operations this quarter versus NOK 23.8 million last year. And year-to-date, NOK 12.6 million versus NOK 24.4 million. So that's -- yes, so that's a slightly lower.

In terms of investment activities, we had NOK 3.9 million of spend versus NOK 11.4 million last year, last year being the investment in the Cloud Center of Excellence as the differential.

And in terms of financing activities, we have, as mentioned, distributed NOK 0.20 dividend payment versus NOK 0.25 last year. And last year, we had a quite aggressive repurchase program of own shares. I think we acquired a net 600,000 share just about. And this year, we have net sold 600,000 shares. So that's the difference there. So we end up the quarter with a cash balance of NOK 27 million, which is NOK 12 million higher than last year.

Looking at the rolling 12 months cash flow from operations, we are at NOK 58 million versus NOK 76 million the previous year and about NOK 22 million negative can be attributed to the discontinued operations that we have.

Yes. As Arne mentioned, the Board has been authorized to pay a supplementary dividend later in the year if they decide so. An alternative could, of course, be to launch a repurchase program of own shares instead. So we'll come back to that in the Q3 reporting probably.

Share price has, along with the rest of the Nordic service -- IT service providers, at least taken a dip in the last 12 months. So we were down 9% or 6% if you take into account the dividends that we have paid in the meantime as well. So we currently have a holding of 1 million Itera shares ourselves.

So lastly, our financial position. On the asset side, the main change is another NOK 12 million on the cash side. Whereas on the liability side, we have a reduction of current liabilities of NOK 21 million and an increase of NOK 30 million on the equity side. So we have a much stronger equity ratio now versus last year, 25% versus 12%.

Yes, that's it. I'm just going to comment a little bit about the future outlook. As mentioned, this regional expansion with 1 more offices will take a little bit of toll on earnings in the next few months before we expected this to have a positive impact in terms of growth and profitability.

The recently enter into an agreement with Microsoft, we can see has already started generating both leads and wins, so we're currently doing some cloud assessment projects for our customers, which will done in the next phase, be converted to a cloud migration project and then the cloud operations subscription type of engagements. And in the meantime, we have excess capacity in terms of the current business volume to be ready to do those both migrations and future operations. So that will also -- in the short term next 6 months or so, have a negative impact on earnings as it has for the past 6 months.

We stand fully commitment -- committed to Ukraine as an invaluable source of IT specialists that we need in the Nordics to realize the sustainable digitalization needs that the businesses have and the energy sector, as Arne mentioned, being one of them.

So today is Ukraine's Independence Day. Let's hope that next year, they will be able to truly celebrate this day. But today, we just stand by them as best as we can. Slava Ukraini, and I wish them all the best on this day and weeks and months to come. Yes, we are very proud of our own colleagues and support them as best we can.

I'm not sure if there are any questions being posted online.

[Operator]

There are no questions.

[Bent Hammer, executive]

There are no questions. No? Okay. We are always welcoming any one-to-one meetings you might want to have with us to discuss Itera. So just feel free to contact us, and we'll set up a meeting. And other than that, we look forward to meeting you on October 25 when we present the Q3 results. So any closing remarks?

[Arne Mjøs, executive]

Slava Ukraini.

[Bent Hammer, executive]

Slava Ukraini. Okay. Thanks.

[Arne Mjøs, executive]

Thanks a lot.